external reference pricing

Why International Reference Pricing is a Very Complex Problem

The other day I was busy being bored in my commuter train back from work, so I started thinking about my hobby of the moment on which I recently blogged: International Reference Pricing (of all hobbies, you’ll say!).  And I started reflecting on all the specific aspects that make this problem a very complex one for even the best-funded Global and Regional Pricing teams.

The obvious:

  • Complex and varied reference rules used by countries
  • New countries start to use a reference system, sometimes with new types of rules
  • Uncertainty in application of rules and timing
  • Rules can be formal or informal (base for negotiation)
  • Need for up-to-date calendar of pricing events to anticipate upcoming mandatory and internal price cuts
  • Practical delay between price review decision and when changes are published
  • Domino effect:  One price cut can have primary, secondary, tertiary, etc impacts over time
  • Need to bring together disparate internal and external datasets: list price by channel, country demand volume forecasts, fx rates (can you find the 3-month rolling average in Brazil in your financial databases?), price corridors, earliest possible launch months, etc
  • Launch sequence mathematics - Computational intensity and run time to evaluate humongous number of combinations (literally, billions of billions of billions)
  • Launch sequence optimization - never 100% sure algorithm with hit the global optimum
  • Need user-friendliness and minimal manual manipulations for analysts to be able to run enough scenarios and easily display meaningful outputs

The less obvious:

  • Risks related to IRP rarely get C-suite exposure, attention or even basic understanding. Problem gets stuck in middle management
  • Global team’s resistance to fully empower affiliates in a fully integrated, transparent and fluent process - though affiliates’ Government Affairs are in dire need for timely, accurate information
  • Price governance including price change requests and approvals generally in a separate legacy system
  • Currency fluctuations: Some countries will use a fixed annual rate (e.g. Romania), others will use a daily rate (e.g. 3-month rolling average in Brazil)
  • Many exceptions to the “default rules”: transitional rules when not enough countries in the basket have launched, possibility to launch before reimbursement is achieved, different rules for orphan and high-specialty drugs, etc
  • Interplay of public and private markets and their strategic significance
  • Need to be on top of Ministries of Health’s calculations, as they  can sometimes confuse which price list to use, use incorrect public data and apply incorrect math (!)
  • Taking into account Parallel Trade, or Cross-border trade (I was told the industry uses the latter to avoid being hit by parallel trade marketing campaigns!)
  • Launch sequence - ongoing task through the complete launch plan - you’ll need to introduce additional constraints as the product launches
  • Integrate with Global Forecasts, receiving demand volume inputs and feeding back price forecasts

The super tricky:

  • Price volume elasticity: Most companies assume similar volume demand forecasts within the set price corridor. This is reasonable is some cases but very deceptive in others
  • Net profitability often not looked at, too much emphasis on gross revenue
  • Need to run models at daily level of granularity for pre-Loss of Exclusivity scenarios
  • History of systems and solutions might deter from building a holistic, end-to-end solution
  • People’s unconditional love for Excel!

I am sure I am forgetting many - can you help me here?

International Reference Pricing needs end-to-end, holistic solutions

The first time I had to deal with the intricacies of International Reference Pricing, I was in charge of the Global Forecasting team at of a top 5 pharmaceutical company. Up until that point, my team’s interactions with the Global Pricing team had always been courteous and straight-forward. Please provide us three assumptions: the yearly price of our in-market and pipeline products, the expected list price year-on-year decrease in all the major countries we were forecasting (e.g. -4% every 2 years in Japan), and an average gross-to-net factor to get to net sales. To be very candid, the Global Pricing team rarely got any feedback or input from us.

I remember the day when a Global Pricing Director explained to me the broad concepts of International Reference Pricing, and that my team was required to develop an Excel-based tool to develop a myriad of scenarios based on product launch dates, product launch prices and a seemingly complex algorithm made of IF statements and hard-coded parameters (little did I know!).

Today, after having interviewed many Pharma Global Pricing strategy experts, I notice that despite being under the same set of rules, most of the top 50 pharmaceutical companies approach the problem with a different angle. What’s more, most still struggle to effectively answer some of the multi-million dollar questions posed by International Reference Pricing.

In most cases, this is due to the history of the teams I talk to. A backbone pricing database was created long time back. An Excel-based price analysis tool was created by pricing analysts on top of it. The referencing matrix is defined in Lotus Notes to foster international collaboration. A courageous team of MIT PhDs tried to develop a statistical solution to launch sequencing optimization. A separate price event tracking tool feeds into this. In the middle of it all, a Global Pricing team with less and less bandwidth and/or body counts, working until late into the night to copy and paste the data over, enter scenario inputs manually, run unoptimized scenario calculations and update reports and slides.

Now that price referencing has spread well beyond Europe (with more countries jumping on board each year), that governments impose more frequent price reporting and price reviews, that they get more creative in terms of rules (second lowest EU country price in Slovakia) and in terms of their application, I believe it is time to strongly advocate for a holistic, productized, customizable, easy-to-use approach to International Reference Pricing.

All in one box! Data integration with all base systems, communication and approval workflows, user-friendly interface, master data management (including rules and price events), exception management, optimized run times, pre-built report and ad-hoc analytics to answer "the next question”, access to Global, Region and Country teams to capture local nuances, rights managed in-tool by a handful of admins. All in one box. Are we as an industry ready for it?

Comprehensive, Interactive Rules Management

Comprehensive, Interactive Rules Management

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